XYZ corporation had a $20,000 net loss in 2018. Kitty has $2000 income in 2016 and...

XYZ corporation had a $20,000 net loss in 2018. Kitty has $2000 income in 2016 and $8000 income in 2017. Kitty is c corporation tax client. How do you handle this case and what you can tell her to write off on her tax?

Expert Solution

Writing Off Business Losses

In order to ease the impact of losses on a growing business, the IRS offers business owners the chance to write off a net operating loss a loss where your expenses for the year are more than your income as well as unpaid invoices. The IRS's Form 1045

is used to calculate what portion of your business losses can be written off on your taxes. Depending on the situation, you can choose to carry back your net operating loss over the past two years or carry it over into future years in order to be able to reduce your future taxes with past losses.

What you can write off is limited by several rules. The IRS does not allow you to deduct the following when calculating a net operating loss:

Any deduction for personal exemptions
Capital losses in excess of capital gains
The section 1202 exclusion of 50 percent of the gain from the sale or exchange of qualified small business stock
Nonbusiness deductions in excess of nonbusiness income
Net operating loss deduction
The domestic production activities deduction

Essentially, these limitations can cap the total losses you can write off on your taxes. Form 1045 walks you through the process of calculating the true amount of your net-operating losses that you can write off.

ekkarill92 answered 1 year ago

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